Making Sense of Broadcom's (AVGO) Buyout Offer For Qualcomm

Making Sense of Broadcom's (AVGO) Buyout Offer For Qualcomm

There are tons of reasons to execute M&A (Merger and Acquisition) deals, where one company buys another. Typically, the acquirer might lack top-line growth, but has tons of disposable cash it doesn’t know what to do with.

In other M&A situations, the target company, which is being acquired, is perceived to be priced below its fair-market value and the acquirer believes it can extract such value at a discount. Neither of these scenarios would seem to apply to either Broadcom (AVGO) and Qualcomm (QCOM). The former sent shockwaves through the market last week, announcing an unsolicited $130 billion offer for Qualcomm — a deal that, if completed, would be the biggest-ever tie-up in the tech sector.

And there’s nothing “normal” about this deal, which introduces tons of complexities given that Qualcomm is in the middle stages of its own mega deal for NXP Semiconductors (NXPI), valued at $47 billion. Broadcom’s bid of $70 per share, which combines $60 in cash and $10/share in Broadcom stock, presents a 30% premium for Qualcomm’s average closing price prior to the deal becoming public. Essentially, Broadcom, which has also eyed NXP, would be killing two birds with one stone.

Still, the timing of the deal is interesting. This is particularly so given the myriad lawsuits and regulatory scrutiny Qualcomm has had to deal with. Not to mention, there’s also the legal battle with its most important client: Apple (AAPL) — all of which have hampered Qualcomm’s shares, which are down more than 1% this year, while the S&P 500 has risen 15%. And this, to me, is the main reason Broadcom, which itself has a strong relationship with Apple — to which it provides wireless components for the iPhone — feels it needs to pounce on this deal now.

The fact that NXP, which has risen 18.5% year to date and trading near 52-week highs, continues to perform very well, makes the deal that much sweeter. Consider, aside from acquiring a strong wireless business of Qualcomm, which through NXP will have tons of automotive expertise, Broadcom will capitalize on earnings accretion given its strong track record of cost-cutting and financial engineering.

In its press release, announcing the deal, Broadcom said that the combined entities (itself, Qualcomm and NXP) not only could deliver annual revenue of $51 billion, adjusted EBITDA would reach $23 billion. And the adjusted EBITDA target could be discounted, given that Broadcom generates some 47% in operating margins, amounting to $9 billion in actual dollar terms. This compares to 32% margins for Qualcomm and NXP.

In other words, Broadcom, which has one of the most underrated management teams in tech, is making this deal before someone else does. Broadcom realizes that it only needs to bring better operating efficiencies to Qualcomm and the 30% (or so) premium it is will to pay today will be repaid many times over. And, oh by the way, if Qualcomm helps Broadcom establish better leverage with its partners, including Apple, that’s just icing on the cake.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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